"It's quite clear that the model of state-led capitalism is being used as an instrument of China's soft power," said Robert D. Hormats, the U.S. State Department's Under Secretary for Economic Affairs.

As China burrows into local economies, leaders from South Africa to Ethiopia have been touting its model for development—one that stresses state-led growth, validates tight-fisted political control and offers a powerful counterpoint to the free-market democracy mantra promoted by the U.S.

China's state-led capitalist system emerged as a hot topic at the World Economic Forum this week, as participants pondered the country's economic success in contrast to recent challenges faced by more free-market systems in the U.S. and Europe.